Retirement Allocation Condition

For Profit Sharing contributions, a plan has an allocation condition of 1000 hours and employment on last day of the plan year, unless "Participant retires during the plan year". What does "retires during the plan year" mean in this case? My interpretation is that the employee must reach Normal Retirement Age (NRA) before terminating service. Would you agree or is there a more subjective interpretation of retirement? I looked at the plan document and it does not specify what retirement means in this circumstance.

Thanks!

Participant separates service after attainment of NRA seems like the condition to me.

In my observation, most documents do not define "retire" or "retirement", at least not directly.  Likely, in your example, it means a severance of employment on or after attaining whatever eligibility for any specific commencement date.  Perhaps the plan defines Normal Retirement and/or Early Retirement?

15 minutes ago, Vlad401k said:

For Profit Sharing contributions, a plan has an allocation condition of 1000 hours and employment on last day of the plan year, unless "Participant retires during the plan year". What does "retires during the plan year" mean in this case? My interpretation is that the employee must reach Normal Retirement Age (NRA) before terminating service. Would you agree or is there a more subjective interpretation of retirement? I looked at the plan document and it does not specify what retirement means in this circumstance.

 

Thanks!

As Lou and David say, your interpretation seems reasonable.

As far as the plan document, it is interesting that the IRS also never defines "retirement" in the code and regulations too.

The documents my firm uses specifically defines the exception as "terminates employment after attaining Normal Retirement Age," so I'm lucky.

The amusing scenario is when someone retires at, say, 66, gets a final contribution that year.  Then is later rehired back part time, and doesn't hit the 1000 hours, so they can't get subsequent contributions until they actually re-terminate.

1 hour ago, Bri said:

The documents my firm uses specifically defines the exception as "terminates employment after attaining Normal Retirement Age," so I'm lucky.

The amusing scenario is when someone retires at, say, 66, gets a final contribution that year.  Then is later rehired back part time, and doesn't hit the 1000 hours, so they can't get subsequent contributions until they actually re-terminate.

It is more amusing when the come back and actually terminate   They get a contribution in that year.  The next year they come back and terminate and get another contribution.  I have seen that go on for years and years.   As long as the termination is legit it is how most plans read.  You get an allocation the year you retire and you retire any time you terminate after NRA.  

I have had that happen a number of times.   I have also seen plans that get amended to say you can only retire for the allocation condition once.   

The other thing is many times in an ESOP you don't get paid until the year after you terminate.  So those coming and going stops the person from getting a distribution.   I have had clients amend their plan to allow a person who is over NRA and has retired once to keep getting a distribution in the year they are rehired.   It was just to allow one person get his distribution otherwise he wouldn't have come back for a short time and they really needed him to come back. 

To the original question.  I agree if the person is NRA and terminates that is a reasonable to say they retired.  

1 hour ago, Bri said:

The documents my firm uses specifically defines the exception as "terminates employment after attaining Normal Retirement Age," so I'm lucky.

Actually, I think all of the documents I have written or otherwise encountered do specifically contain this or a similar statement, such that it is not left to subjective interpretation. I'm surprised by the other responses.

One word of caution.  Some K plans will also have a definition for "Normal Retirement Date" that is the 1st of the month following the date a participant reaches NRA.  I just amended my K plan at the end of 2020 to change Normal Retirement Date from the 1st of the next month to be the actual date the participant reaches NRA.  The sad possibility of having someone quit their job on their 65th birthday only to realize that they didn't actually "retire" was enough for me to get that definition amended, plus, also wanted K plan to mirror Retirement Date definition in my ESOP plan and to let HR have uniformity in definitions.